To help homeowners avoid foreclosure, many lenders are open to a mortgage modification. The procedure allows homeowners who are struggling to come up with a way to make the payments more affordable to change the original loan conditions. This usually means lengthening the term of the loan or lowering the interest rate to get your monthly payments down. Loan modifications can reduce the principal, but lenders rarely agree to that, according to Marcie Geffner of the Bankrate website.
After you apply for a mortgage modification, you might expect to be assigned one person as your contact point. But this is not the way it usually works. Each time you call the lender for some information, you typically talk with someone new who knows nothing about your case. This causes you to repeat or provide the same information over and over again, causing you wasted time and much frustration. Many people feel as if they are getting the runaround, according to a February 2012 article by Nelson D. Schwartz in “The New York Times.” If people do get one point of contact, that person might not be easy to reach. One California woman quoted in Schwartz's story said she reached her contact person once in 30 attempts.
Lenders don’t want to do loan modifications because they want to get the most money possible, which usually involves you abiding by your loan terms. If you can’t fulfill the terms, lenders could do a modification for you if you qualify, but they often don’t want to. It is sometimes cheaper and easier for the lender to simply foreclose instead of putting together a complex loan modification package. Many lenders don’t have the extra staff it would take to do loan modifications and they're unwilling to hire more employees to make it possible.
Too Many Applications
The mortgage crisis of 2008 caused an unprecedented number of people to not be able to afford their mortgages. This led to an unusually large number of people applying for loan modifications. Federal Reserve governor Daniel K. Tarullo, in December 2010 testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs, said there are “structural problems in the mortgage servicing industry.” Simply put, mortgage servicers cannot handle their caseload of mortgage modification applications.
Many people who sought a loan modification were told to stop making their mortgage payments while the mortgage servicer reviewed their application. Banks would often tell homeowners they could not be helped until they were behind in payments. An employee of a large bank, according to “LA Weekly News,” actually told a customer that while the bank could not officially tell people to stop paying their mortgage, he was doing so as a favor. Heeding that kind of advice turned out to be a mistake for many people. More often than not, missing mortgage payments only served to put the homeowner in a delinquent status that would lead to foreclosure and a ruined credit score. Housing advocates filed a class action lawsuit against the bank mentioned in the "LA Weekly News." Lenders might be able to make more money foreclosing in some cases, which makes the practice of advising people to stop making mortgage payments troubling. The Consumer Financial Protection Bureau lists different types of loan modification scams, and one is telling you to stop making your mortgage payments. If anyone tells you to do that, you can file a complaint with the CFPB.
Not Successful for Long
Many people who were successful in negotiating a loan modification fell behind in mortgage payments within in the first year, according to Marilyn Kennedy Melia of Bankrate.com. After any late fees and missed payments were added back to the loan, the monthly payments remained the same in many cases. And some homeowners were not completely honest about their financial situation; they tried to make their financial picture look better to qualify for the loan modification. The bottom line is that if your income is too low and your debts are too high, you might not be able to afford your mortgage -- loan modification or not. The only way to succeed is to tell lenders exactly what you can afford.
- Bankrate.com: Borrowers Look for Mortgage Modification
- "The New York Times": Some Doubt a Settlement Will End Mortgage Ills
- PBS Newshour: Winners and Losers in Home Mortgage Modification
- Board of Governors of the Federal Reserve System: Testimony
- Bankrate.com: New Mortgage, Old Problem?
- "LA Weekly News": Stop Making Loan Payments to Win Loan Modification?
- Creatas Images/Creatas/Getty Images